SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
Commission File No. 000-22687
JLM INDUSTRIES, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter.)
DELAWARE 06-1163710
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
8675 HIDDEN RIVER PARKWAY, TAMPA, FL 33637
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (813) 632-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
CLASS OUTSTANDING AT MAY 14, 1999
- ----------------------- ---------------------------
Common stock, par value 6,667,275
$.01 per share
<PAGE>
JLM INDUSTRIES, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
- ------ --------------------- ------
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and
March 31, 1999 (unaudited) 3
Unaudited Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) for the Three Months
Ended March 31, 1998 and 1999 4
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 16
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 18
Item 2 Changes in Securities and Use of Proceeds 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
2
<PAGE>
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,480,566 $ 1,584,460
Accounts Receivable:
Trade 29,703,639 28,821,264
Other 5,374,933 5,960,745
Inventories 16,100,357 15,307,983
Prepaid expenses and other current assets 2,606,308 5,060,811
Income tax receivable 459,736 1,299,702
------------- -------------
Total current assets 56,725,539 58,034,965
Other investments 3,194,259 2,286,684
Property and equipment, net 28,384,989 27,946,115
Goodwill and other intangibles 11,981,624 11,754,223
Other assets 2,978,878 2,987,229
------------- -------------
Total assets $ 103,265,289 $ 103,009,216
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 37,804,598 $ 33,787,142
Current portion of long-term debt 1,872,483 1,592,473
Loans payable 451,742 873,000
Deferred revenue -- 360,000
------------- -------------
Total current liabilities 40,128,823 36,612,615
Long-term debt less current portion 14,723,646 14,568,298
Deferred income taxes 5,517,407 6,112,472
Minority interest 255,867 359,152
Deferred revenue -- 3,784,778
Other liabilities 1,958 4,287
------------- -------------
Total liabilities 60,627,701 61,441,602
Stockholders' Equity:
Preferred stock - authorized 5,000,000 shares;
0 shares issued and outstanding -- --
Common stock - $.01 par value. Authorized
30,000,000 shares; 7,118,811 and 7,140,561 shares
issued, respectively 71,188 71,406
Additional paid-in capital 21,330,709 21,497,991
Retained earnings 23,424,747 22,568,112
Foreign currency translation adjustment 128,871 (107,407)
------------- -------------
44,955,515 44,030,102
Less treasury stock at cost - 424,199 and
48,336 shares, respectively (2,317,927) (2,462,488)
------------- -------------
Total stockholders' equity 42,637,588 41,567,614
------------- -------------
Total liabilities and stockholders' equity $ 103,265,289 $ 103,009,216
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
JLM INDUSTRIES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenues $ 58,565,101 $ 65,837,540
Cost of sales 50,631,222 60,564,887
------------ ------------
Gross profit 7,933,879 5,272,653
Selling, general and administrative expenses 4,357,858 5,613,262
------------ ------------
Operating income (loss) 3,576,021 (340,609)
Interest expense - net (204,275) (432,789)
Other income (expense) - net 131,581 (274,915)
Foreign currency exchange gain (loss) - net 10,973 (8,019)
------------ ------------
Income (loss) before minority interest and income taxes 3,514,300 (1,056,332)
Minority interest in income of subsidiaries -- (103,285)
------------ ------------
Income (loss) from continuing operations before income
taxes and discontinued operations 3,514,300 (1,159,617)
------------ ------------
Income tax provision (benefit):
Current 1,244,223 (678,973)
Deferred 356,580 375,990
------------ ------------
Total income tax provision (benefit) 1,600,803 (302,983)
------------ ------------
Income (loss) from continuing operations before
discontinued operations 1,913,497 (856,634)
Loss from operation of discontinued operations, net
of tax benefit of $5,873 (8,810) --
------------ ------------
Net income (loss) 1,904,687 (856,634)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax (expense)
benefit of $(349) and $157,519, respectively 523 (236,278)
------------ ------------
Comprehensive income (loss) $ 1,905,210 $ (1,092,912)
============ ============
Basic income (loss) per share:
Income (loss) from continuing operations before
discontinued operations $ 0.27 $ (0.13)
Discontinued operations -- --
------------ ------------
Net income (loss) per share $ 0.27 $ (0.13)
============ ============
Diluted income (loss) per share:
Income (loss) from continuing operations before
discontinued operations $ 0.27 $ (0.13)
Discontinued operations -- --
------------ ------------
Net income (loss) per share $ 0.27 $ (0.13)
============ ============
Weighted average number of shares outstanding used for:
Basic income (loss) per share 7,106,080 6,694,612
Diluted income (loss) per share 7,129,700 6,741,544
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,904,687 $ (856,634)
------------ -------------
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Deferred income taxes 356,580 595,065
Minority interest in income of subsidiaries -- 103,285
Depreciation and amortization 765,417 955,272
Loss from partnerships 12,000 12,000
Loss from sale of assets -- 336,008
Allowance for doubtful accounts 97,903 18,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (602,672) 878,563
(Increase) decrease in inventories (2,824,552) 792,374
Increase in prepaid expenses and other current (146,744) (2,468,183)
assets
Increase in other assets (223,995) (8,351)
Decrease in accounts payable and accrued expenses (6,314,316) (3,849,956)
Increase in income taxes payable 1,297,154 --
Increase in income taxes receivable -- (839,966)
Increase in deferred revenue -- 4,144,778
(Decrease) increase in other liabilities (219,609) 2,329
------------ ------------
Net cash used in operating activities (5,898,147) (185,416)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets held for sale 15,871 --
Capital expenditures (347,166) (223,632)
Other investments (7,548,504) (40,433)
------------ ------------
Net cash used in investing activities (7,879,799) (264,065)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from loans payable 7,119,127 421,258
Proceeds from long-term debt 7,500,000 --
Repayments of long-term debt (240,459) (487,044)
Purchase of treasury shares -- (144,561)
Proceeds from sale of common stock 18,191 --
------------ ------------
Net cash provided by (used in) financing activities 14,396,859 (210,347)
Effect of foreign exchange rates on cash 523 (236,278)
------------ ------------
Net increase (decrease) in cash and cash equivalents 619,436 (896,106)
Cash and cash equivalents, beginning of period 5,214,197 2,480,566
------------ ------------
Cash and cash equivalents, end of period $ 5,833,633 $ 1,584,460
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 207,049 $ 211,230
============= ============
Income taxes $ 96,106 $ --
============= ============
Non-cash investing activities:
Capital lease obligations $ -- $ 51,686
============= ============
Non-cash financing activities:
Issuance of restricted stock $ -- $ 167,500
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
NOTE 1 DESCRIPTION OF BUSINESS
JLM Industries, Inc. and subsidiaries ("JLM" or the "Company") is a
leading marketer and distributor and a manufacturer of certain commodity
chemicals, principally acetone and phenol. JLM is headquartered in Tampa,
Florida. The Company believes it is the second largest marketer of acetone and
the fifth largest marketer of phenol in North America. JLM is also a global
distributor of olefins, principally propylene, as well as a variety of other
commodity, inorganic and specialty chemicals. In order to provide stable and
reliable sources of supply for its products, the Company (i) maintains
long-established supplier relationships with several major chemical companies,
(ii) manufactures phenol and acetone at its Blue Island, Illinois plant and
(iii) sources acetone from its joint venture manufacturing operation in Mt.
Vernon, Indiana. The Company's principal products are used in the production of
adhesives, coatings, forest product resins, paints, pharmaceuticals, plastics,
solvents, synthetic rubbers and food processing. The Company sells its products
worldwide to over 1,000 customers.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. Income results
for the interim periods are not necessarily indicative of the results that may
be expected for an entire year. In the first quarter of 1998, the Company's cost
of sales was adjusted to reflect a proportionate share of the estimated LIFO
supplement. During the first quarter of 1999, no adjustment was made to the LIFO
supplement as the LIFO supplement is estimated to remain relatively constant
during 1999. These unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 1998 included in the Company's Form 10-K dated March 30,
1999.
NOTE 3 EARNINGS PER SHARE DATA
The Financial Accounting Standards Board ("FASB") issued Statement
Financial Accounting Standard ("SFAS") No. 128, EARNINGS PER SHARE. SFAS No. 128
6
<PAGE>
requires that "basic" and "diluted" earnings per share replace the primary and
fully diluted earnings per share, respectively. The basic calculation computes
earnings per share based only on the weighted average number of shares
outstanding as compared to primary earnings per share that includes common stock
equivalents. The diluted earnings per share calculation is computed similarly to
fully diluted earnings per share. All earnings per share amounts for all periods
presented conform to SFAS No. 128.
In conjunction with the initial public offering, the Company issued
436,500 options to employees of the Company at an exercise price of $10 per
share under its Long-Term Incentive Plan ("LTIP"). During 1998 and 1999, the
Company granted 6,000 and 100,000 options, respectively, under the LTIP to
employees of JLM. The options granted in 1998 have an exercise price of between
$10.50 and $11.00 while the options granted in 1999 have an exercise price of
$5.00. Additionally, on January 1, 1999, the Company issued 40,000 shares of
restricted stock to an officer of the Company of which 10,000 options were
immediately vested and the other 30,000 vest ratably over three years (see Note
6). As of March 31, 1998 and 1999, there were 381,500 and 534,300, respectively,
of such options and restricted stock outstanding due to employee turnover. The
impact of the dilutive effect of the options included in the calculation of
diluted weighted average shares outstanding that was due to the impact of the
average market price being in excess of the exercise price is illustrated below
for the three months ended March 31:
1998 1999
---- ----
Basic weighted shares outstanding 7,106,080 6,694,612
Dilutive effect of outstanding options 23,620 46,932
Diluted weighted shares outstanding 7,129,700 6,741,544
NOTE 4 INCOME TAXES
The provision (benefit) for income taxes for the three months ended
March 31, 1998 and 1999 is calculated using the estimated annual income tax
rates based on projected annualized income.
NOTE 5 COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose consolidated
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 does not require a specific format
for that consolidated financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
consolidated financial statement. SFAS No. 130 requires that an enterprise (i)
classify items of other comprehensive income by their nature and (ii) display
the accumulated balance of other comprehensive
7
<PAGE>
income separately from retained earnings and additional paid-in capital in the
equity section of a consolidated statement of financial position. The Company
has adopted SFAS No. 30 in the accompanying consolidated financial statements of
income (loss) and comprehensive income (loss).
NOTE 6 SIGNIFICANT EVENTS
Effective January 1, 1999, the Company granted 100,000 options under
the LTIP to the employees of JLM at an exercise price of $5.00 per share. These
options vest ratably over a three-year period. In addition, on January 1, 1999,
the Company issued 40,000 shares of restricted stock to an officer of the
Company of which 10,000 shares are vested immediately and the remaining portion
vests ratably over a three-year period.
During March 1999, the Company entered into an agreement with a
customer to supply certain of its products over an extended period. As part of
this agreement, the customer has agreed to partially prepay for the product and
the Company has agreed to apply such partial prepayment to future sales of such
product based on the then current market price. Should the Company default on
the contract, all such unapplied prepayments shall be returned to the customer.
The prepayment is included in deferred revenue in the accompanying unaudited
consolidated balance sheet.
During 1998, the Company's Board of Directors approved a Stock
Repurchase Program (the "Program") whereby the Company can purchase up to
500,000 shares of its common stock. During the three months ended March 31,
1999, the Company purchased 21,200 shares of its common stock for approximately
$108,500.
NOTE 7 SEGMENT DATA
In June 1997, the FASB issued SFAS No. 131, SEGMENT DATA, that requires
companies to report selected segment information in their quarterly reports
issued to shareholders for fiscal years beginning after December 31, 1997. It
also requires, among other items, entity-wide disclosure about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers.
JLM's business consists of a manufacturing and a marketing segment.
JLM's manufacturing segment includes the operations of JLM Chemicals, Inc. and
the sale of acetone manufactured at the Mt. Vernon Phenol Plant. JLM's marketing
segment includes its distribution, storage and terminaling operations and all
other sourcing operations. Marketing segment revenues include an assumed selling
commission determined in accordance with industry standards for the sale of
products manufactured at JLM Chemicals, Inc. The marketing segment also includes
an assumed allocation of revenues, costs of goods sold and expenses associated
with the sale of products sourced from the Mt. Vernon Phenol Plant, which
allocation
8
<PAGE>
is determined on a basis consistent with the commission for sale of products
manufactured at JLM Chemicals, Inc.
The following schedule presents information about JLM's continuing
operations in these segments and geographic locations for the quarters ended
March 31:
<TABLE>
<CAPTION>
INDUSTRY SEGMENT 1998 1999
------------- -------------
<S> <C> <C>
Revenues:
Marketing $ 42,246,326 $ 56,988,201
Manufacturing 16,318,775 8,849,339
------------- -------------
$ 58,565,101 $ 65,837,540
============= =============
Operating Income (Loss):
Marketing $ 632,572 $ (154,568)
Manufacturing 3,552,127 359,167
Corporate (608,678) (545,208)
------------- -------------
$ 3,576,021 $ (340,609)
============= =============
Capital Expenditures:
Marketing $ 238,017 $ 222,279
Manufacturing 109,149 1,353
Corporate -- --
------------- -------------
$ 347,166 $ 223,632
============= =============
Depreciation and Amortization:
Marketing $ 197,432 $ 476,808
Manufacturing 454,267 423,703
Corporate 113,718 54,761
------------- -------------
$ 765,417 $ 955,272
============ =============
Identifiable Assets:
Marketing $ 42,602,132 $ 68,798,698
Manufacturing 31,000,776 24,579,212
Corporate 21,379,541 9,631,306
------------- -------------
$ 94,982,449 $ 103,009,216
============= =============
GEOGRAPHIC LOCATION
Revenues:
United States $ 47,995,976 $ 34,694,942
Venezuela 2,908,120 1,465,885
Holland 6,427,000 12,764,032
Singapore -- 13,955,868
Other nations 1,234,005 2,956,813
------------- -------------
$ 58,565,101 $ 65,837,540
============= =============
</TABLE>
9
<PAGE>
Operating Income (Loss):
United States $ 4,282,046 $ (79,718)
Venezuela (33,413) (55,748)
Holland (157,777) (177,577)
Singapore - 113,598
Other nations 93,843 404,044
Corporate (608,678) (545,208)
------------ -------------
$ 3,576,021 $ (340,609)
============ =============
Identifiable Assets:
United States $ 86,220,354 $ 76,527,638
Venezuela 1,834,660 878,956
Holland 5,905,673 9,613,913
Singapore - 11,011,447
Other nations 1,021,762 4,977,262
------------ -------------
$94,982,449 $ 103,009,216
============ =============
NOTE 8 SUBSEQUENT EVENTS
In April 1999, the Company settled a 1997 contract dispute for
$500,000. The item is included in costs of sales in the accompanying unaudited
consolidated statements of income (loss) and comprehensive income (loss). In
addition, the Company sold an investment real estate property for approximately
$600,000 cash. The sale of the property generated a loss of approximately
$336,000 that is included in other income (expense) - net in the accompanying
unaudited consolidated statements of income (loss) and comprehensive income
(loss).
*********************
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the unaudited Consolidated Financial Statements
appearing in Item 1.
JLM is a leading marketer and distributor and a manufacturer of certain
commodity chemicals, principally acetone and phenol. The Company believes it is
the second largest marketer of acetone and the fifth largest marketer of phenol
in North America. The Company's business consists of a manufacturing and
marketing segment. The Company's manufacturing segment includes the operations
of its Blue Island, Illinois Plant and the sale of acetone manufactured at the
Mt. Vernon Phenol Plant.
Within the Company's manufacturing segment, the Blue Island
phenol/acetone Plant continued to operate at full capacity during the three
months ended March 31, 1999.
The Company's marketing segment includes its distribution, storage and
terminaling operations and all other sourcing operations. Effective April 1,
1998, the Company expanded its marketing segment through the acquisition of all
the assets of Browning Chemical Corporation ("Browning"). With the acquisition
of Browning, the Company broadened its product, supplier and customer base.
Browning was founded in 1948 and is a major marketer of inorganic chemicals with
a diversified product range serving both the industrial and food processing
markets.
In May 1998, the Company entered an agreement with Tolson Holding B.V.
("Tolson"), a Dutch global distributor and trader of methanol, solvents,
aromatics and olefins, to acquire certain subsidiaries of Tolson. The
acquisition of the Tolson subsidiaries expanded the Company's international
chemical business, especially in Asia and Europe, including Russia where Tolson
already has an existing business structure.
In July 1998, the Company acquired 50.1% of the outstanding common
stock of Inquinosa International, S.A. ("Inquinosa"), a Spanish Company, for
$450,000 plus an estimated $1.35 million to be funded through a three-year
earn-out period on a formula defined in the acquisition agreement. During the
second quarter of 1999, the Company paid $350,000 under terms of the agreement.
Inquinosa is a worldwide marketer of the pesticide Lindane.
11
<PAGE>
Set forth below for the periods indicated, is certain unaudited segment
information for the Company's manufacturing and marketing segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
1998 1999
----------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Marketing $ 42,246 72.1% $ 56,988 86.6%
Manufacturing 16,319 27.9% 8,849 13.4%
-------- -------- -------- ------
$ 58,565 100.0% $ 65,837 100.0%
======== ======== ======== ======
Gross profit:
Marketing $ 3,237 40.8% $ 3,773 71.6%
Manufacturing 4,697 59.2% 1,500 28.4%
-------- -------- -------- ------
$ 7,934 100.0% $ 5,273 100.0%
======== ======== ======== ======
Segment operating income (loss):
Marketing $ 633 15.1% $ (155) --
Manufacturing 3,552 84.9% 359 176.0%
-------- -------- -------- ------
Total segment operating income 4,185 100.0% 204 100.0%
Corporate expenses (609) -- (545) --
-------- -------- -------- ------
Total operating income (loss) $ 3,576 100.0% $ (341) 100.0%
======== ======== ======== ======
</TABLE>
During the three months ended March 31, 1998 and 1999, the
manufacturing segment sold approximately $1,391,000 and $3,162,000,
respectively, of products to the marketing segment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Revenues increased $7.2 million to $65.8 million for the
three months ended March 31, 1999 from $58.6 million for the comparable period
in 1998, an increase of 12.3%. Revenues for the marketing segment increased
$14.7 million to $56.9 million for the three months ended March 31, 1999 from
$42.2 million for the comparable period in 1998, an increase of 34.8%. The
increase in marketing revenues was generally the result of sales from the
Company's 1998 acquisitions, partially offset by decreased selling prices on
most of the Company's products. Revenues for the manufacturing segment decreased
$7.5 million to $8.8 million for the three months ended March 31, 1999 compared
to $16.3 million for the comparable period in 1998, a decrease of 46.0%. This
decrease in manufacturing segment revenues was due primarily to lower overall
selling prices for the two main products, acetone and phenol, during the first
quarter of 1999 compared to the same period in 1998.
GROSS PROFIT. Gross profit decreased $2.6 million to $5.3 million for
the three months ended March 31, 1999 from $7.9 million for the comparable
period in 1998, a decrease of 32.9%. As a percentage of revenues, gross profit
decreased to 8.0% for the three months ended March 31, 1999 from 13.5% for the
comparable period in 1998. Gross profit for the marketing segment increased $.5
million to $3.8 million
12
<PAGE>
for the three months ended March 31, 1999 compared to $3.3 million for the same
period in 1998. The increase of the marketing gross margin was due to sales
volume increases principally from the Company's 1998 acquisitions, partially
offset by lower margins on the Company's existing product base due to lower
selling prices and the settlement of a 1997 contract dispute for $.5 million.
Gross profit for the manufacturing segment decreased by $3.2 million to $1.5
million for the three months ended March 31, 1999 from $4.7 million for the
comparable period in 1998, a decrease of 68.1%. The decrease in manufacturing
gross profit was principally the result of lower selling prices in its two main
products, acetone and phenol, coupled with stable raw material costs during the
three months ended March 31, 1999 compared to the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.2 million to $5.6 million for the three
months ended March 31, 1999 from $4.4 million for the comparable period in 1998,
an increase of 27.3%. This increase is primarily the result of expenses relating
to the Company's recent acquisitions made during the second and third quarters
of 1998, including an increase of approximately $108,000 in amortization expense
related to the goodwill and other intangibles resulting from these acquisitions.
Without the 1998 acquisitions, actual selling, general and administrative
expenses would have been $.3 million lower in 1999 as compared to 1998. This
reduction is due primarily to a reduction in personnel costs.
OPERATING INCOME (LOSS). Operating income decreased $3.9 million to a
loss of $.3 million for the three months ended March 31, 1999 from $3.6 million
for the comparable period in 1998, a decrease of 108.3%. This decrease was
principally as a result of the factors that decreased gross profit as discussed
above.
INTEREST EXPENSE - NET. Net interest expense increased by approximately
$0.2 million to $0.4 million for the three months ended March 31, 1999 from
approximately $0.2 million for the comparable period in 1998, an increase of
100.0%. This increase in interest expenses was principally due to the Company's
borrowings on its lines of credit to finance certain of its 1998 acquisitions.
OTHER INCOME (EXPENSE) - NET. Other income (expense) in 1998 consisted
principally of income from investments. In 1999, other income (expense)
consisted primarily of a loss on the sale of investment real estate of
approximately $336,000 that was sold for approximately $600,000. This loss in
1999 was partially offset by income from the Company's other investments.
FOREIGN CURRENCY EXCHANGE GAIN (LOSS). Foreign currency exchange gain
(loss) remained relatively constant for the three months ended March 31, 1999
compared to the same period in 1998. This stabilization in the foreign currency
exchange gain (loss) was principally the result of the currency stability in
Venezuela, Holland and Singapore during these periods.
INCOME TAX PROVISION (BENEFIT). The Company's benefit for income taxes
was approximately $.3 million for the three months ended March 31, 1999 compared
to an income tax expense of $1.6 million for the comparable period in 1998. The
net
13
<PAGE>
income tax benefit for the three months ended March 31, 1999 was incurred
primarily on the Company's U.S. operations partially offset by income generated
by the Company's other operations. The Company's Venezuelan and Holland
operations have not recorded any income tax benefit in 1999 or 1998 due to the
uncertainty of utilizing the income tax loss carryforwards. In addition, the
Company's consolidated effective tax rate is lower than the statutory rate due
to the Company's ability to reduce its taxable income on U.S. export sales
through the use of the Company's Foreign Sales Corporation ("FSC") that has an
effective tax rate of 11.8%.
NET INCOME (LOSS). During the three months ended March 31, 1999, the
Company incurred a net loss of approximately $0.9 million compared to net income
of approximately $1.9 million for the same period in 1998. This net loss in 1999
was due primarily to the factors stated above.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company renegotiated additional lines of credit with
two new financial institutions in the amount of $52 million. The Company now has
a total borrowing capacity of approximately $125 million.
Net cash used in operating activities decreased by $5.7 million to $.2
million for the three months ended March 31, 1999 compared to $5.9 million for
the same period in 1998. This decrease was due primarily to the increase in
deferred revenue from the prepayment under a sales contract (see Note 6 of
unaudited consolidated financial statements) offset by changes in the Company's
operating accounts. Net cash used in investing activities decreased by
approximately $7.6 million to $.3 million for the three months ended March 31,
1999 compared to $7.9 million for the same period in 1998. This decrease was
primarily the result of a $7.5 million payment made on March 31, 1998 for the
acquisition of Browning from funds borrowed on the Company's acquisition line of
credit. Net cash from financing activities went from cash provided by financing
activities of $14.4 million for the three months ended March 31, 1998 to cash
used in financing activities of $.2 million during the three months ended March
31, 1999, a change of $14.6 million. This change was due primarily to the
borrowings on the Company's acquisition line of credit to fund the purchase of
Browning, mentioned above, partially offset by changes in the Company's
borrowings and repayments of its loans payable and other long-term debt.
The Company expects capital expenditures for its manufacturing and
terminaling facilities to be approximately $1.0 million for the remainder of
1999 and $.75 million for 2000.
JLM believes its liquidity and capital resources, including its ability
to borrow additional amounts under its credit agreements, are sufficient to meet
its currently anticipated needs through the foreseeable future and to permit it
to continue to
14
<PAGE>
implement its business strategy. In addition, requirements of bringing the
Company's information systems to compliance with Year 2000 standards will not
have a material impact on its liquidity or capital resources.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs using the last
two digits rather than all four digits to record an applicable year. Should any
of the Company's computer programs, hardware or software use "00" as the year
rather than the year "2000" it could result in a system failure, miscalculations
or disruptions of the Company's business, including a temporary inability to
provide services to its customers.
The Company recognized this problem over two years ago. As such, the
Company began a program whereby all internally used programs, hardware and
software would be evaluated to determine the best course of action to take in
order to ensure that all such items are Year 2000 compliant.
The Company began in late fiscal 1996 to search for a new business core
application that would provide more flexibility with the Company's growing needs
as well as being Year 2000 compliant. In the first quarter of 1998, the Company
concluded its search and has begun the transition to the new application system
and expects to complete conversion by the end of the second quarter of 1999 for
all domestic JLM companies. Additionally, the Company has completely replaced
all other hardware and software programs that provide both standardization of
the Company's computer environment and are all Year 2000 compliant.
The Company also recognized that the Year 2000 compliance issue also
affects its vendors and customers. Therefore, the Company initiated a plan with
all of its vendors and customers to ensure that no material disruption of
service would occur due to the Year 2000 issue. Based on the responses received,
it does not appear that any such material disruption will occur due to the lack
of any of our vendors or customers not having operating systems that are Year
2000 compliant.
Additionally, the Company has identified Year 2000 vulnerabilities with
its international operations and will have in place business core applications
by the end of the second quarter of 1999 that are Year 2000 compliant. By the
end of 1999, all hardware will be in Year 2000 compliance for the Company's
international operations. The Company anticipates that the total cost of
implementing the new business core applications to be $0.3 million.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the cost of
labor, equipment and raw materials. The Company does not believe that inflation
has had any material effect on the Company's business over the last three years.
15
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The majority of the Company's U.S. transactions are denominated in U.S.
dollars. The Company's foreign subsidiaries operate in their local currencies.
The Company does, from time to time, purchase short-term forward hedge exchange
contracts to hedge payments that are in other than the local currency. The
purpose of entering into these short-term forward exchange contracts is to
minimize the impact of foreign currency fluctuations on the results of the
Company's operations. Certain increases or decreases in these payments are then
offset by gains and losses on the related short-term forward exchange contracts.
In addition, the Company has in the past entered into fixed financial hedge
contracts on certain of its raw materials for use in its manufacturing segment.
During 1999, the Company did not enter into any material fixed financial hedge
contracts and there were no fixed financial contracts open as of March 31, 1999.
COMMODITY PRICE RISK
JLM enters into contracts whereby parties to the contracts agree to
exchange various quantities of inventory, primarily acetone, over a specified
period of time. JLM records these exchanges of inventory at the lower of cost or
market. As of March 31, 1999, the Company had the following related to inventory
exchanges:
<TABLE>
<S> <C>
Total net pounds payable under the exchange contracts 807,926
</TABLE>
Due to the fact that the Company is a market maker in the largest
component of its inventory exchanges - acetone, the Company normally becomes
aware of future price fluctuations in acetone prior to such prices being
disclosed on the open market. Therefore, the Company believes that it can
reposition itself with respect to the majority of its inventory exchanges in
order to minimize the market risk inherent in such positions.
INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in
interest rates based upon its financing, investing and cash management
activities. The Company utilizes a balanced mix of debt maturities along with
both fixed-rate and
16
<PAGE>
variable-rate debt to manage its exposure to changes in interest rates. The
Company does not expect changes in interest rates to have a material adverse
effect on its income or its cash flows in fiscal 1999. However, there can be no
assurances that interest rates will not significantly change in 1999.
FORWARD LOOKING INFORMATION
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The potential
risks and uncertainties that could cause actual results to differ materially
include: the cyclical nature of the worldwide chemical market; the possibility
of excess capacity; fluctuations in the cost and availability of raw material
prices; the political and economic uncertainties associated with international
operations; fluctuations of foreign exchange; the risks associated with
potential acquisitions, and the ability to implement other features of the
Company's business strategy.
17
<PAGE>
JLM INDUSTRIES, INC.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
The Company at times does have routine litigation incidental to its business. In
the opinion of the Company's management, such proceedings should not,
individually or in the aggregate, have a material adverse effect on the
Company's consolidated results of operations or consolidated financial
condition. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes are reasonable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company has not paid dividends on its Common Stock and does not
anticipate that it will pay dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, for future operations and
for the expansion of the Company's business. Any determination to pay dividends
in the future will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial
restrictions, restrictions imposed by applicable laws and other factors deemed
relevant by the Board of Directors. Furthermore, the Company and its
subsidiaries are restricted from paying dividends under certain credit
agreements to which they are a party.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES: None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None.
ITEM 5 - OTHER INFORMATION: None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits :
10.40 Employment agreement between JLM Marketing, Inc., a Delaware
Corporation, and Walter M. Tarpley dated December 3, 1998.
(b) Reports on Form 8-K during quarter ended March 31, 1999 - None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JLM INDUSTRIES, INC.
Dated: May 14, 1999 /s/ JOHN L. MACDONALD
-------------------------------------------
John L. Macdonald
President and Chief Executive Officer
/s/ FRANK A. MUSTO
-------------------------------------------
Frank A. Musto
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
19
EXHIBIT 10.40
Walter M. Tarpley
9911 Gleneagle Place
Powell, Ohio 43065
December 3, 1998
John L. Macdonald
President and CEO
JLM Industries, Inc.
8675 Hidden River Parkway
Tampa, FL 33637
Dear John:
This letter formalizes the employment agreement between myself and JLM
Marketing, Inc., a Delaware corporation ("the Company") for employment based at
your office in Tampa. The capacities in which I shall serve and the terms and
conditions, which shall be applicable to my employment, are set forth below:
1. I shall be President of JLM Marketing, Inc., and shall perform all
duties necessary in carrying out that function. I shall report to the
Chief Executive Officer of JLM Industries, Inc. ("JLM"), the Company's
principal shareholder, and shall perform my duties to the satisfaction
of that Officer.
2. I shall devote substantially all of my time, knowledge, experience and
energies during business hours to the performance of my duties
hereunder.
3. The terms of my employment shall be as agreed between the parties and
as set forth in the addendum to the employment agreement, and made a
part hereof.
4. My employment shall commence January 1, 1999 and shall continue to
December 31, 2002. Thereafter, my employment may continue at will but
none of the provisions of this Agreement (except Paragraph 6.B.) will
be in effect, and I will be entitled to the benefits of whatever
Company Policy is in effect at that time.
5. This Agreement may only be terminated during the Term hereof by the
Company for cause. "Cause" shall mean an event of fraud, gross
misfeasance or willful neglect in the performance of my duties and
obligations, or the willful failure to carry out the business
instructions of the Chief Executive Officer of JLM. In the event the
Company terminates this Agreement for other than "cause", I will be
entitled to all the remaining terms of my employment set forth in the
Addendum.
20
<PAGE>
6. A. If I terminate my employment voluntarily prior to the termination of
this Agreement, I agree that, for a period of one year of my
termination, I will not compete with the Company with respect to
products managed by me, or for which I had principal responsibility,
either as an employee or as a more than 10% shareholder of any
competing entity.
B. Whenever I leave the employment of the Company, I will not remove
and/or utilize any Confidential Information of the Company for any
purpose whatsoever. "Confidential Information" is defined to include
any information as to financial "positions" of the Company in
chemicals; any information on the requirements or needs of any
customers or suppliers of the Company; any information as to the
Company's strategic or long range plans or any other similar
proprietary information relating to the Company's business. I
specifically acknowledge that I would be liable in damages for any
breach of this promise.
7. This Agreement may be amended or modified only in writing executed by
both parties.
8. The Company and any affiliates for which I may perform duties shall
indemnify me for any approved expenses or liabilities, which I may
incur in the lawful performance of my duties hereunder.
9. This Agreement shall be construed and governed by the laws of the
State of Florida.
10. Any controversy or claim arising out of or relating to this Agreement
or breach thereof shall be settled by final and binding arbitration in
accordance with the rules of the American Arbitration Association and
judgment upon the award rendered may be entered in any court having
jurisdiction thereof. If the Company breaches this Agreement as
determined by an arbitration panel, it shall pay my reasonable
attorney's fees and costs associated with the enforcement of this
Agreement.
11. In the event of a sale of all or substantially all of the assets of the
Company, this Agreement shall either be acquired by the purchaser as an
asset or remain as a liability of the Company. In the event of the
latter, all terms in the addendum shall become immediately payable.
21
<PAGE>
If the foregoing correctly sets forth our Agreement, please sign and return a
duplicate original of the letter whereupon it sha1l constitute the final and
binding Agreement between myself and the Company.
Agreed: Agreed:
By: /s/ WALTER M. TARPLEY By: /s/ JOHN L. MACDONALD
--------------------------------- ----------------------------------
John L. Macdonald
President
and Chief Executive Officer
<PAGE>
EMPLOYMENT CONTRACT
WALTER M. TARPLEY
TITLE: President, JLM Marketing and
Vice President, JLM Industries, Inc.
DIRECT
COMPENSATION: $175,000 per year basic salary and a monthly car allowance
of $650.00. Country Club allowance equal to monthly
dues.
VARIABLE
COMPENSATION: Participation consistent with the terms and conditions of
the current informal JLM Industries, Inc. bonus program.
STOCK GRANT: 40,000 shares of stock granted, vested at the rate of
10,000 shares per year over four years. 10,000 shares to
be delivered immediately upon employment and 10,000 shares
per year thereafter on the anniversary of employment.
STOCK OPTIONS: 40,000 share options granted at the NASDAQ closing
market price on the first day of employment. Share
options will vest over four years consistent with the
terms and conditions of such plans.
EMPLOYEE BENEFITS: Immediate eligibility to participate in all defined
employee benefit plans consistent with the terms and
conditions of such plans.
RELOCATION EXPENSES: Full Reimbursement for all expenses incurred to
relocate to Tampa, Florida. Such expenses shall include,
but not be limited to, sale and purchase of home,
household goods relocation, transportation as appropriate
and temporary housing if required.
CONTRACT OF
EMPLOYMENT: Four-year employment contract commencing January 1,
1999 and terminating on December 31, 2002. Terms and
Conditions of such Contract of Employment will be defined
by mutual agreement of the parties.
23
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,584
<SECURITIES> 0
<RECEIVABLES> 36,584
<ALLOWANCES> 1,802
<INVENTORY> 15,308
<CURRENT-ASSETS> 58,035
<PP&E> 37,898
<DEPRECIATION> 9,952
<TOTAL-ASSETS> 103,009
<CURRENT-LIABILITIES> 36,613
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 41,496
<TOTAL-LIABILITY-AND-EQUITY> 103,009
<SALES> 65,838
<TOTAL-REVENUES> 65,838
<CGS> 60,565
<TOTAL-COSTS> 5,613
<OTHER-EXPENSES> 283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 433
<INCOME-PRETAX> (1,160)
<INCOME-TAX> (303)
<INCOME-CONTINUING> (857)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (857)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
